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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Only Way OPEC Can Kill U.S. Shale

drilling tower

One commodity analyst got it right: the OPEC cuts would not work. After November last year when the oil cartel announced its agreement with Russia and 11 other producers to curb production in a bid to prop up prices, the overwhelming mood was optimistic. The main worries were that some members would cheat and that U.S. shale may prove to be more resilient than previously believed.

That’s exactly what happened. U.S. shale did prove more resilient, although it has its own cloud hanging over it: debt levels. OPEC members did not exactly cheat, but some of them were slow to reduce their output as agreed. And, of course, Russia got the better end of the bargain, agreeing to a puny 300,000 bpd reduction—and a gradual one at that—from its record-high October daily production rates, while Saudi Arabia had to shoulder a burden of about half a million bpd.

Prices went up to about US$50 a barrel in the month immediately following the agreement, and stayed above US$50 over January. Then the oil price slide began—hesitant at first, and then steadier as the months went by.

Today, oil is back to pre-agreement levels, and optimism has largely given way to pessimism. Eugen Weinberg has been saying this for a while, but he has been a lonely voice among bankers who rushed to revise their oil price forecasts upwards before the ink on the OPEC agreement was dry. Related: Shell Nigeria Declares Force Majeure On Nigerian Light Oil Exports

Commerzbank’s head of commodity analysis wrote in early December that the OPEC production cut would only serve to strengthen the rise in U.S. production, and he kept his outlook on oil prices unchanged: Weinberg forecast that crude would slide below US$50 this year, which is exactly what is happening right now. Meanwhile, these same banks that were quick to revise their price outlook upwards are now just as quick to downgrade their earlier outlooks as the bleak reality firmly settles in.

Weinberg advised OPEC to change tack and go back to what it set out to do initially: stifle U.S. shale by pumping at maximum. “They should let prices crash to kill shale and then aim for steady price increases in the long term,” Weinstein told Bloomberg. The question remains, however, whether OPEC, with oil-reliant budgets already strained, could afford this tactic reversal now that they’ve suffered price lows for an extended period of time. Related: Is Wall Street Funding A Shale Failure?

And while it would hurt to do just that, OPEC may not have too much of a choice. The options right now are 1) to keep going with the cuts as-is, 2) to deepen the cuts, and 3) to give up the cuts and follow Weinberg’s advice. The first option would result in no great change in prices, most likely, and it might add fuel to diversification efforts. These efforts, however, require a lot of investment, which would be hard to come by if OPEC chooses option three.

Option two is perhaps even worse than the others: an OPEC insider, Qatar’s ex-Oil Minister Abdullah al-Attiyah, told Bloomberg that deeper cuts will only benefit U.S. shale boomers, and would not benefit OPEC. “The problem is that there is someone waiting in the dark corner for OPEC -- it’s shale oil producers and whenever prices rise, they raise production,” he said.

In the price context, Weinberg’s suggestion to return to maximum production may at some point make the most sense. Prices may indeed take a nosedive if OPEC turns the taps on full max. Yet, the decline may not be as severe as OPEC fears—a possibility that would further poke gaping holes into precarious oil-dependent budgets.

And given the political diversity of OPEC, would the group realistically be able to rally its troops behind such a painful move, even if it wanted to?

By Irina Slav for Oilprice.com

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  • Martin Lewis on July 16 2017 said:
    Bad advice that would't kill shale. Flooding the market wouldn't work for anyone. Just stabalize at 50. Eye roll.
  • Kr55 on July 16 2017 said:
    Shows an unfortunate misunderstanding of the oil market. The Saudi's are now trying to prevent a spike in oil prices 2-3 years in the future that would likely cause a huge market crash and demand crash. Before that crash happened however, a huge wave of new production would be invested in that would come online in the middle of a demand crash, leading to another massive glut that could take even longer to work off.

    The fears of lack of investment causing a price spike are real, and it's a worse case scenario for all producers. Sure, you would get 6-12 months of high prices, but it would be followed by years of pain.
  • zorro6204 on July 16 2017 said:
    Yeah, flooding could have worked, back in the winter of 2015-16 OPEC should have capitalized on the fall of oil prices and kept the pedal to the metal, hope to do so much damage to US shale that it would be slow coming back as prices eventually rose, slowly enough so that shale production would merely keep up with demand increases.

    But they didn't commit, and made it worse with the cuts. The drill rigs came flying out of the woodwork and the US is expected to set an all-time production record next year. To flood now starts the waiting period all over again, from a much higher production level. It might work, but they've wasted time, bled more cash and now might not be able to stand the pain needed.

    It's a lousy situation, probably the best they can do is hold where they're at, keep prices in a $40-55 range, hoping that demand increases can absorb shale and other production for the next few years. There's no short term solution, they can only think in terms of 2020 and beyond. Maybe the lack of investment will eventually lead to a tighter market. Maybe.
  • Bracha Sarah on July 16 2017 said:
    The war over the price of oil is useless. If OPEC pumps like crazy, US shale producers can simply lie low and wait. If people fill their cars at a dollar a gallon, the OPEC countries will run out of cash reserves and their people are used to free education and free hospital care and free everything else and they will not tolerate working for a living and paying for everything. European countries are mandating electric cars. Solar as well as other renewables will be able to help keep the import of oil to a minimum. Right now gas powered cars are getting increasingly fuel efficient and electric cars with battery backup in the home and solar on the roof will defeat any attempt at raising prices. New solar panels have been developed that are twice as efficient, they are just not in production yet but they will be. No matter what OPEC does it is defeated, it has lost the battle for controlling the cost of oil. There can be little fluctuations for a while but they have been defeated and they will never again be a pricing power.
  • Sean on July 17 2017 said:
    OPEC have done just enough to bankrupt nearly every shale company. Do they really want the prices to go up and further hasten the transition to electric vehicles?

    Mission accomplished, $45 - 55 the new norm.
  • Shahin on July 17 2017 said:
    Well, at the moment option three seems far away. We should consider KSA's plan of a huge economic surgery through IPO of ARAMCO's stocks in 2018 which requires oil prices of at least 60$. Flooding the market to kill shale and then wait for a steady long-term increase in oil prices doesn't add up. As a middle-eastern I guess option 1 is the only way here.
  • Amvet on July 17 2017 said:
    Shale oil and gas companies are losing money on each sale. Increasing volume will help????
  • Mark M on July 17 2017 said:
    No. This man is very wrong. The mistake that was made was OPEC and Russia massively increased production in 2013-14 while shale was taking off. This crashed prices and instead of wiping out shale they made the shale patch stronger, lowered the break even cost for shale and got rid of the weak way over leveraged players.

    Had they maintained production levels to early 2013, the shale patch would not had the pressure to innovate and prices would have come down slower and production levels for US Shale would have stayed muted.

    Prices would not have crashed to the 30's - probably low 50's and OPEC budgets would not have been crushed.

    If they return to flooding the market they will be bring social unrest to their countries while only knocking out a few shale companies (most are in much better shape than 2014)

    Best option for OPEC - realize shale is here to stay and that production cannot go much above 10M barrels for shale over the medium run, cut production a little more back to early 2014 levels (yes, lose some marketshare but $60 oil much better at lower production that all out at $30 barrel), cap Libya and Nigeria. And most importantly, help the world economy flourish by keeping prices moderately low so demand grows. Without major projects and discoveries happening the last 3 years...this low investment will lead to supply needs as demand increases.

    In other words, be patient and let demand drive the equation.
  • Lucas on July 17 2017 said:
    'The Only Way OPEC Can Kill U.S. Shale' ... and itself at the same time...
  • Citizen Oil on July 17 2017 said:
    There are two major mistakes with this "analysts" remarks. First, the cuts are working in that oil would be sub $ 30 without them. Second, why all the obsession over shale oil ? They are max 5 % of the total market and the concern should be weighted that way. Major decline rates are happening as we speak in offshore and some mega projects that take years to bring online and yet you're worried about shale players ? Sometimes I feel oil shorters are paying off journalists to spread the doom and gloom. If OPEC decides to go full speed ahead again it will surely mean the destruction of the oil market and many countries will go the way of Venezuela. Not smart.
  • Disgruntled on July 17 2017 said:
    It's not too hard for OPEC to get oil prices wherever they would prefer them to be. In the midst of the Great Recession, circa Fall '08 through to the Fall '10, OPEC cut their production to 28.5 - 29.5 mmbopd. That did the job for them (and the rest of us, too) then and it could do the job for them again today. If they did that now it would jet prices to $100+/bbl, no problem. The present rate of about 32 mmbopd is an historically high level for them over the last 15 years. So, they can sell 32 mmbo for $45/bbl, or they can sell 30 mmbo for probably, what, $80/bbl? (most likely more than that) You do the math. They certainly can, but it's not what they want right now.

    This talk about OPEC losing control of the markets is ridiculous.
  • Geo on July 17 2017 said:
    This situation reminds me of Proctor and Gamble... who have giant earnings, market share is dwindling...and high expenses. This also includes Gillette and Dollar Shave Club... and ISIS and Obama. All of the above mentioned allowed too much time to pass allowing the opponents to regain or gain strength. To remove them now is more costly and sacrificing...then killing the tree while small, at its roots. Obama failed, P&G, Gillette...refused to change too little too late.

    This seems to be a mental issue with certain leaders, who came out of some learning from someone somewhere. They are matrix thinkers, not P&L thinkers. Many matrix thinkers fall behind the growth curve, thinking survival long term. Sad... you can do both and thrive.

    Thus why Dems will continue to fail and the Trumps dog them at the polls.
    If you snooze, you lose. Ask your body when your +55 yrs of age.

    It's a natural law in the universe. If you snooze, your opponent will gain advantage...when you refuse to change.
  • Seth on July 17 2017 said:
    OPEC has already died as it exists in name only as a way for corrupt oil ministers to enjoy luxury travel and lodging in Vienna. There is literally nothing OPEC can do to destroy shale as they tried to kill shale earlier, which just made shale producers innovate faster to lower costs.

    Say they all go to max-production, and the price of oil drops to something ridiculous, like $20, OPEC countries will starve while most shale producers are hedged.

    OPEC wanting to destroy shale is like Luxembourg announcing they intend to conquer the world.
  • Henry on July 17 2017 said:
    OPEC has no good solution. The EV market will dictate what will happen in the future and thats out of big oils control.

    Hey remember kerosene ? Same thing here, something better comes along and replaces it. Its pretty easy to see where we are heading. We have near worldwide market manipulation just to keep oil in the mid $40 range. You think they will cutback forever. Sure......get in line for some ocean property in North Dakota.
  • Kevin Brown on July 17 2017 said:
    I think option three is unlikely to work as well as it did in 2015. Cost structures have shifted for US fracking and the pain would not be as severe since we are only going down ten $s or so.
  • ian Macallester on July 17 2017 said:
    The only thing that could kill Shale is the US Government at the behest of the Environmental lobby.
  • Bill Simpson on July 17 2017 said:
    They could drive up the price if they agreed on deeper cuts. But they would have to be substantial cuts, so as to create a global oil shortage within a few months. Shale doesn't contain enough oil to come close to replacing the oil that would be lost if the major oil exporting countries suddenly agreed to cut their production by 20%. It would be impossible to replace the lost output by drilling shale oil wells fast enough. It would be like trying to replace gasoline powered cars with battery powered cars in 5 years. It couldn't be done. You could never build batteries fast enough. Of course, you can continue to drive old cars. There is no substitute for the energy supplied by crude oil, nor will there be for a couple more decades.
    Lucky for us, they will never agree to such massive production cuts.
  • Eric Peterson on July 17 2017 said:
    The days of OPEC controlling the price of oil are over. They failed to take into account America's ability to innovate into infinity. We have found a way to overcome every obstacle thrown down in front of us since Jamestown. OPEC got greedy driving oil to over $100.00 per barrel, and set in motion market forces that those socialists and fascists will never be able to comprehend. Can they cause short term pain? Sure, though that short term pain will only hasten their demise. Every time they try to jack us out of more of our wealth we will turn the market on them, with devastation. The markers have been laid down and there is no spineless administration available for them to buy off, anymore.

    Note to all Socialist/Fascist/Communist/Progressives: The market always wins!
  • Richard Graham on July 19 2017 said:
    The Saudis and OPEC have one weapon: market manipulation.
    Open up the taps first and flood the market with as much oil and gas as can be immediately produced.
    Wait 3 months, then turn of the taps completely (or say you will) and drive the price up to crazy levels.
    Wait three months, and turn on a flood of product.
    Turn the market into chaos, remove any price or supply certainty, and no one will risk investing in new exploration and development.
    Wait for natural demand growth to mop up excess supply.
  • Mohammad Ebraheem on July 20 2017 said:
    I think this was OPEC first strategy when prices when down from above $100 in 2014. The aim was to kill shale production. Yet shale production was able to develop new technology to lower their cost. I expect oil prices to go below $35 before the end of this year. OPEC has to accept the new reality. Some think the Trump administration which is very pro-fossil fuel will help drive oil prices higher in coming years and ease regulation on fracking. Which I totally disagree, oil prices game is much bigger than any US strategy, the world is moving towards other directions which will only make things worse for OPEC. The US will eventually feel left behind by being more dependant on fossil energy products while the world moving towards the opposite direction, something even Trump will never gamble with even for his own benefits.
  • wait and see on July 20 2017 said:
    The path is laid to future huge spikes. Now 4 years into 10% or less of normal oil investment will mean when the wells start to dry up and they will, after re-drilling programs fail to meet demand and the usa shale oil (small bucket wells)can not keep up and saudi pumps and all it can and still cant keep up. Oil prices will rise like never before... it takes 5 year from knowing there is oil to getting it out of ground(assuming you the investment) on conventional large oil fields. The only question is will be is it 2 year or 5 year or 8 years???? (mainly on usa peak supply is an unknown) the longer it take the worse and the longer the spike of oil price will be.... So go work in another industry for while,,,,,, smile at all that goes on and wait.....

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